UK Inflation Rate Dips on Low Fuel, Clothing Costs

Consumer price inflation in Britain slowed to 3.2 percent in June from 3.4 percent in May due to lower prices for car fuel, clothing and shoes, official statisticians said Tuesday.

Despite the further improvement from a 17-month peak of 3.7 percent in April, the benchmark rate remained stubbornly above the Bank of England's target of 2 percent, raising uncertainty about how long it can avoid a rate hike.

The Office for National Statistics said the retail prices index — a separate measure widely used in wage negotiations — fell to a 5 percent annual rate in June, from 5.1 percent in May.

The statistics agency said the main inflationary pressure came from sharp increases in air fares and hikes in insurance premiums.

Consumer price inflation has been above 3 percent all year, raising questions about how much longer the Bank of England's Monetary Policy Committee (MPC) could hold its key interest rate at an all-time low of 0.5 percent.

The Bank believes inflation will fall back closer to target later this year.

"Although it could be a tense few months, we still think that a near-term rate hike will be avoided," said Vicky Redwood, senior U.K. economist at Capital Economics.

One member of the MPC, however, pushed his appeal for higher interest rates to combat inflation.

Andrew Sentance, so far the only member of the committee to vote for a rate hike to 0.75 percent last month, explained his thinking in a speech to the Thames Valley Chamber of Commerce.

He stressed that monetary policy should adapt to the latest evidence on the economy.

"In my view, that now points to a gradual withdrawal of some of the stimulus we provided to the economy in more difficult circumstances last year not so much as to undermine the recovery, but to keep it on a low inflation path," he said.

If inflation remains well above the 2 percent target over the next 18 months, the Bank will find it difficult to resist a rise in interest rates, said Simon Hayes and Fabio Fois at Barclays Capital.

"So long as the committee remains concerned about downside risks to growth — from consumer and business reactions to fiscal consolidation and demand from overseas — we expect policy forbearance to continue," they wrote in a research note to investors.

"However, in the absence of any further nasty economic surprises the momentum behind a rate hike is likely to grow during the second half of the year."

Consumer price inflation in Britain slowed to 3.2 percent in June from 3.4 percent in May due to lower prices for car fuel, clothing and shoes, official statisticians said Tuesday.Despite the further improvement from a 17-month peak of 3.7 percent in April, the benchmark...